Tuesday, March 06, 2007

Record Readings in the Put/Call Ratio

The CBOE put/call ratio is running at a very high level of 1.33 right now. This is the 10th day in a row that this indicator has exceeded the 1.0 level. That has pushed the 10-day moving average to a new record of 1.27, eclipsing the record high of 1.22 from last May. (my data goes back to 1995)

Also, the ARMS Index hit an all-time high of 15.98 last week, the highest level since its inception in 1967 (according to Dick Arms). And the NYSE showed 99% down volume during last Tuesday's decline. I don't have data on that, but I would bet it is some sort of multi-decade record.

So what does it all mean? First, looking back to last summer's correction, the spike in the put/call ratio was a signal that the bottom was near, but the market still took a couple more weeks before hitting its final low. I think it's a good roadmap for this time around also, and that the market will probably probe a little further to find a low, but that the majority of the damage is behind us.

Longer-term, I think it's a classic example of bull market volatility. Richard Russell used to say that the bull will try its best to buck off the majority of investors during its run. I also don't think this is how bull markets end, with huge spikes in the fear indicators. I would be more worried if all of the downside volatility was met with complacency. But this is clearly not the case.

So I will let the bottoming process take shape, and then start to look for the early winners out of the correction that will likely lead us back to new highs.


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